But this landscape is changing, and the Japanese government has made significant strides to limit healthcare spending, increase exports and incentivize the development of novel drug products in recent years.

In this article, we will explore the trends shaping the Japanese market, as well as assessing the challenges and opportunities in the sector.

Drug Pricing – No Cause for “Red Alert”

Drug pricing continues to be the subject of much debate in Japan, with some industry groups reporting a “drug lag” as a result of the current system. Under this system, the government can impose sizable price cuts on drugs generating better-than-expected growth, driven by additional indications or other circumstances. It does this to curb health spending and support the country’s universal healthcare system, which has been under pressure due to an aging population and shrinking tax base.

In Japan, drug pricing is set by the Central Social Insurance Medical Council (Chuikyo), an advisory body to the Ministry of Health. Biannual drug pricing revisions are made in addition to off-year or ad-hoc revisions, as was the case in 2021 when the government revised 70% of National Health Insurance (NHI) listed drug prices. The impact of this went beyond industry expectations, leading to some concern regarding the predictability of reimbursement practices.

Not all drugs are subject to annual price revisions, however, and can be exempted if they meet the criteria of the price maintenance premium (PMP).

While drug repricing has been the subject of criticism within the industry, it may not represent the threat to innovation that some imagine. Patrick Branch, a partner at LEK Consulting, argues that the Japanese government’s approach is largely pro-innovation, and the most significant impact of price revisions is felt by only a handful of companies.

“There's been some changes over recent years, but I didn't think it's red alert time in Japan around pricing,” he told CPHI.

“The way that the pricing system is designed, every time a drug gets approved for a new indication it means that there’s addressable market increases, the sales go up and then pricing rules basically claw back the gain and keep those drugs at a ceiling of around $1 billion per year,” he said.

“Those companies are in a little bit of a conundrum, and I sympathize with their position. But that's only companies up against that $1 billion dollar mark. It's about five brands overall.”

Differences also exist in terms of how domestic companies and multinationals are exposed to changes in price rules. Branch explained that as Japanese companies tend to have more primary care-focused portfolios with less innovative therapies, they have been “hit quite hard” by the reforms. Meanwhile, multinationals operating in Japan tend to have more specialty-focused portfolios that fare better in the current system.

Speaking about the pricing and access environment, Branch commented: “It's not quite as generous and permissive as it used to be, and that’s understandable. The population is getting older, tax receipts are under pressure and there's no economic growth. Japan has to pay for healthcare somehow and, like everywhere else in the world, pharmaceuticals are an easy target. It’s to be somewhat expected that this happens, but it it's not an apocalyptic scenario that can't be managed through.”

Generic Drug Penetration – A Catalyst for Innovation?

Historically, Japan has had a lower penetration of generic drugs compared to other developed markets such as the United States and Europe. However, there has been a sharp rise in generics penetration since the turn of the century due to a shift in government policy.

Responding to the country’s aging population and the rising costs of branded drugs, the government enacted legislation to cut expenditures on medical costs and shift funding from low-cost generics to innovator products. In 2015 the government set a target of 80% generic drug penetration by September 2020, though it fell short of this goal by about 2%. As of September 2021, the share of generics in the Japanese prescription drugs market stood at around 79%.

While Japan remains a major market for pharmaceuticals, ranking just behind the US and China, its global market share has declined from 12% in 2003 to 7% in 2019. Ludwig Kanzler, founder of Hanegi Solutions, explained that this reflects the contraction of the Japanese economy as a whole.

“What Japan has done fairly successfully over the years is to constrain its gross healthcare expenditure more or less in line with GDP, but GDP hasn't grown much in Japan. That's the biggest reason why Japan, in terms of healthcare costs in the global spend, has been shrinking,” he said.

“It's also because the economy has been shrinking, relative to the rest of the world. Japan holds a smaller place in the global economy that it used to and with that, healthcare makes up a smaller portion.”

And although this could be taken as bad news for the future of Japanese pharma, Kanzler argues that funding is actually being put to much better use.

“Japan used to spend a lot of money on rubbish – on things that are not reimbursed in other countries anymore, that people can just buy cheaply OTC. And that has changed. Generic penetration has finally reached 80%, and it used to be nothing just 15 years ago. So, the innovative part of the market has actually grown at the expense of the non-innovative part. And if you look at it that way, it's actually not such a bad story,” he said.

Differentiated Products Driving Growth Areas

Though some segments of the Japanese market have stagnated in recent years, others are poised for growth. Unsurprisingly, the greatest opportunities in the sector come from innovative therapies and drugs that address unmet medical needs.

As is the case globally, the anti-cancer drug market is one such growth area in Japan. The oncology market is forecast to grow by a CAGR of 5.2% up to 2026, at which point it is expected to represent one-fifth of the entire market. Cancer is one of the top three leading causes of death in Japan and the country’s government is increasingly prioritizing patient-oriented cancer treatment, most recently via the third version of the national Basic Plan to Promote Cancer Control.

The biosimilars market represents another growth area, despite a sluggish start. But because of how the drug reimbursement system works in Japan, some healthcare providers are incentivized to prescribe certain biosimilars (such as filgrastim), while the system deters adoption of other biosimilars by making them more expensive than the originators for patients (as in the case of the monoclonal antibody infliximab). This is to do with the cap on medical co-pays, which lowers when reached three times in one year. Since costly originators are more likely to reach the cap limit, patients can end up paying less for them than they would for certain biosimilars. Therefore, it is essential that companies bringing biosimilars to the Japanese market have a good understanding of patient-co-pay dynamics and financial incentives in order to capitalize on opportunities in the sector.

Finally, it should come as no surprise that growth in the generic drug market is expected to continue. This segment is expected to expand at a CAGR of 9% up to 2026, in large part due to the government’s efforts to increase generics penetration. Currently, Japan is the world’s eighth largest market for generic drugs in terms of value.

For companies seeking to take advantage of the growth opportunities present in the Japanese market, Kanzler noted that differentiating new treatments from existing drugs is crucial.

“I think the biggest challenge is always to make the case for your treatment as being differentiated and better than what's out there in a market that is very fragmented and where decisions are still made very much by individual doctors rather than societies, guidelines, payers, etc. That can be a challenge, but it's also something that you can prepare for,” he said.

Japan vs China – How Are Investors Approaching their Portfolios?

A recent Japan Times article expressed concern that US and European companies are “setting up basic research and development facilities in China while pulling them out of Japan.” It also noted that domestic drugmakers are moving their development bases overseas, in a bid to explore the opportunities offered by markets with high growth potential and more relaxed price rules.

However, the industry experts interviewed for this piece believe the Japanese market still represents an attractive investment due to its stability and positive risk profile. According to Branch, “there's some pretty big geopolitical risks around China, which don't really exist for Japan. So, if you think about it from a portfolio perspective as an aggregate market, maybe it's not so exciting – but there are opportunities to grow within Japan.”

He added: “You'd be foolish not to develop for Japan, if you can do so cheap, efficiently and get a good opportunity at the end of the day. You have some certainty around that, whereas if you did the same for China it's not easy to bring your drugs to market. Pricing also isn’t great and there's a lot of uncertainty.”

Branch noted that individual companies remain “pretty positive about Japan” as long as they are aligned with the market’s growth areas.

Overall, Japan is a mature market with relatively low barriers to entry and stable foundations. Its pricing and access environment presents challenges, but companies can circumvent these by shifting focus to innovative therapies and remaining in tune with reimbursement rules, co-pay dynamics and financial incentives. And with several pharmaceutical patents coming to an end in the coming years, it will be interesting to observe how Japanese corporations respond to this changing business landscape.

Finally, the country’s aging population and rising life expectancy will continue to drive demand for treatment and shape future trends in the pharmaceutical industry.

Author: Rebecca Lumley, CPhI Online

Note: This article was first published on cphi-online.com on Jul. 20, 2022.